RBI asks UCBs to exercise caution on loan against gold

NEW DELHI: The Reserve Bank on Monday cautioned urban co-operative banks to take due care and follow the guidelines before extending loans against pledge of gold and silver.

"In order to mitigate the inherent risks attached to sanction of loans and advances against gold/silver ornaments, urban cooperative banks are advised to observe the safeguards," RBI said in a notification issued here today.

The banking regulator said it has observed that some urban cooperative banks (UCBs) were granting advances against the pledge of gold and silver without exercising due care in the sanction of such loans.

Among the other things, the banks have to ensure that loans extended against gold/silver do not exceed Rs 1 lakh at any point of time. They also have to see that the period of loan is not exceeding one year from the date of sanction.

Besides, the interest will be charged to the account at monthly interval but will become due for payment along with principal only at the end of 12 months from the date of sanction, the RBI said.

Also, the banks should prescribe a minimum margin to be maintained in case of such loans and accordingly fix the loan limit taking into account the market value of the security, expected price fluctuations and interest that will accrue during the tenure of the loan.